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Baidu Options Activity Could Weigh on These ETFs

If options market activity is an accurate harbinger, ETFs with significant allocations to Chinese Internet stocks could be in for some near-term retrenchment. Baidu (BIDU), China’s largest search engine firm, could be the negative catalyst.

“Puts protecting against a 10 percent decline in Baidu’s American depositary receipts cost 4.3 points more than calls betting on a rally of the same magnitude last week,” reports Belinda Cao for Bloomberg. That skew was the highest in a year, according to Bloomberg.

While Baidu remains the dominant search company in the world’s largest Internet market, dubbed the “Google of China,” some declines for the stock could be in the offing as investors become increasingly concerned about Baidu’s deal-making, which some view as profligate. Since July, the company has spent nearly $2.5 billion on acquisitions.

Stopping Internet ETFs, particularly those focused on China, has been a difficult task this year. Although none of the three China Internet/technology ETFs are large, they have all delivered outsized returns this year. The Guggenheim China Technology ETF (CQQQ) is up 49% and the Global X NASDAQ China Technology ETF (QQQC) is higher by 46%. The KraneShares CSI China Internet ETF (KWEB) has jumped 19.5% since its July debut. [China Internet ETFs Have Room to Run]

The average weight to Baidu in those three ETFs is 9.3%. Baidu is facing competitive threats from rivals that also dot the rosters of the aforementioned ETFs. Qihoo 360 Technology (QIHU) is eating into Baidu’s search business. In part, that has sparked Baidu’s acquisition activity in the mobile space. [Chinese Internet Stocks Boost This ETF]

Qihoo 360 is a top-five holding in QQQC and KWEB. Baidu’s net income margin may narrow to 35 percent in 2013 from 47 percent, according to analysts’ average estimate, Bloomberg reported.

Weakness in Baidu does not necessarily guarantee weakness for ETFs like CQQQ and KWEB, but should Baidu tumble, that would mean stocks such as Tencent and Qihoo would have to pick up the slack for the ETFs. Tencent, China’s largest Internet company, has an average weight of 9.7% in the three ETFs mentioned here.

Guggenheim China Technology ETF

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CQQQ

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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